Business: Are Capital Spending Fortunes Improving?

At least some companies are beginning to believe the economy is in recovery mode. Emboldened by the Wall Street bulls and eager to borrow money before interest rates go up another quarter-point or more, a number of food processors are beginning to invest in their plants and company infrastructure at levels modestly above last year's rate.

Americans' growing appetite for cheese as an ingredient has been sated by a series of huge cheese plants in the West, the newest being this $192 million facility for SouthWest Cheese in Clovis, N.M.

A spot survey of 10 of the larger companies, while not statistically defensible, nevertheless shows an increase of nearly 5 percent in their capital spending budgets for 2005. While some sizable companies are cutting back – General Mills, for example, is down 27 percent – most of those who responded to our survey are spending more, many of them significantly more, on capital improvements this year.Tyson is one of the bright spots. The animal protein company has budgeted $600-650 million for the current year, up considerably from the $486 million last year and $402 million in 2003. A big piece of the current budget is going to a major plant overhaul, but there are numerous other projects in the work meant to increase capacity and generally put the company on a growth trajectory.ConAgra's budget is up 36 percent, to $475 million. While much of the money will be going toward information systems upgrades, a fair amount will go toward "machinery, equipment, real estate improvements – things one would expect from a major manufacturer," according to Christopher Kircher, vice president of corporate communications.Campbell Soup has budgeted $380 million for the current year, up nearly $100 million from 2004 and 2003. Here, too, part of the reason are information system upgrades, but the soup company's budget includes a major expansion of a North Carolina plant and finishing touches on a 2004 expansion of another.About $40 million is budgeted on the Maxton, N.C., plant to increase capacity for microwaveable bowls and the Soup-at-Hand product line. The project should be complete this summer. Only finishing touches remain in a largely 2004, $20 million project at Marshall, Mich., which added new cookers, canning and warehousing and increased capacity by about 50 percent. It also added 60,000 sq. ft.The bulk of Campbell's capital budget will go for an enterprise resource planning software upgrade and for trucks, warehouses and other components in a takeover of distribution in Australia.Getting back to General Mills, the Minneapolis company has been reducing spending for at least the past two years. After spending $750 million in 2003, just over a year after the Pillsbury acquisition, capital expenditures dipped to $653 million in 2004 and are forecast at $450-500 million this year. The company has been more interested in debt reduction, allocating $47 million in 2003, $572 million (just under capital spending) in 2004 and $625 million in 2005. It also has been increasing dividends.Kraft, traditionally the biggest spender, is holding steady. The leading food firm budgeted $1-1.1 billion for capital this year, at least in line with the $1.006 billion spent last year. But there are no big bricks-and-mortar projects planned. "Approximately two-thirds of the spending will be on 'profit-enhancing' projects (such as cost reduction and new products) and one-third will be on 'profit maintenance' (equipment replacements, systems infrastructure)," says a spokesperson.Some 'world's largest' projectsThe biggest project currently under way is a $192 million American cheddar cheese plant in Clovis, N.M., for SouthWest Cheese Co. The company is a joint venture, formed just for this purpose, among global cheese producer Glanbia Foods (based in Ireland with U.S. headquarters in Twins Falls, Idaho) and two large milk cooperatives — Dairy Farmers of America and Select Milk Cooperative — as well as some local producers.Gargantuan cheese plants in the Mountain Time Zone have been nearly annual occurrences in the past 10 years, with each new one eclipsing the size of the previous continental record-holder. This 340,000-sq.-ft. cheese factory will be North America's largest when it is commissioned this October, employing 225 at full production. It will consume 6.6 million lbs. of milk each day to produce industrial-size chunks of cheese: 40-lb. blocks, 500-lb. barrels and 640-lb. barrels. A valuable byproduct will be 275,000 lbs. of high-quality, 80 percent concentration whey protein per hour.A really close second in terms of spending is a $180 million expansion and overhaul that will triple the capacity of Dreyer's Grand Ice Cream's Laurel, Md., plant. Ground was just broken last November. The project also will add a state-of-the-art warehouse to serve the eastern U.S. and will create more than 300 new jobs (current employment is 220) by the time the project is completed in 2007.The facility was owned by Nestle Ice Cream Co. but was handed over to Oakland, Calif.-based Dreyer's as part of the two companies' 2002 merger. Till now, the plant has been dedicated to frozen novelties, but this 600,000-sq.-ft. expansion will introduce two packaged ice cream lines, enabling the manufacture of Haagen-Dazs and some other packaged products. It also includes 10 new frozen snack production lines plus 200,000 sq. ft. of frozen warehouse space. Total square footage for the Laurel plant will be nearly 700,000 sq. ft. when completed.Dreyer's has another plant expansion on the list of the 10 largest capital projects for 2005. The company broke ground mid-year 2004 on a $100 million expansion that also will triple the capacity of the former Nestle Ice Cream Bakersfield, Calif., plant. It will create 250 new jobs and should open before summer.

A group of pork producers and investors pooled resources to form Triumph Foods and to build a $150 million processing facility in St. Joseph, Mo.

The Bakersfield Operations Center currently makes 90 types of frozen snacks, including Drumstick, Nestle Crunch Bars, Push-Ups, Toll House Cookie Sandwiches and Carnation Ice Cream Sandwiches. The expansion will add 400,000 sq. ft. and five ice cream production lines, enabling the manufacture of packaged products Dreyer's Grand and the new Slow Churned Dreyer's Grand Light. It also includes a new warehouse with a 20-door shipping dock and new research and development facilities including a pilot plant for flavor development, labs and prep kitchens.The biggest new plant on the list belongs to Triumph Foods, a new company put together by a group of hog producers. The investors reportedly have interests in a number of hog processing facilities across the country, but the biggest will be a $130 million facility scheduled for a fall opening in St. Joseph, Mo. The 630,000-sq.-ft. plant (under construction in photo at right) will perform slaughtering and processing and will become the company's headquarters. The building will open with 350 employees but employment could grow to 1,000.A foreign name on the list is Italy's Ferrero Group. The food and confectionery manufacturer, with such brands as Ferrero Rocher, Mon Cheri, Nutella and Tic Tac, is building a new production facility in Brantford, Ontario, at a cost of US$122 million. It will comprise 600,000 sq. ft. and employ 600 when it opens in the second half of 2006. The first product to be made there will be Ferrero Rocher candies. It will be designed for expansions that could double its size.Animal protein is hotA more familiar name on the new projects list is Tyson. It's in the midst of two big projects that are among reasons its capital spending budget could be up nearly a third this year over last.Tyson just began a $100 million project to create its third case-ready meats plant out of a once-shuttered Oscar Mayer plant in Sherman, Texas. The plant was only open 1974-1978, but IBP bought it just before the formerly independent company was acquired by Tyson in 2001. The other big project, about half complete, is a new research and development center at corporate headquarters in Springdale, Ark. The Discovery Center is a $40 million, 184,000-sq.-ft. home to product development kitchens, consumer testing and a pilot plant, which is scheduled to open late this year. A Tyson spokesperson also said the company is spending on miscellaneous projects to increase automation and to "support growth of our value-added products."Like Tyson's projects, a number of the largest plant projects under way involve animal protein. Another big one is Smithfield Foods Inc.'s $85 million ham manufacturing plant, which just broke ground in Kinston, N.C. The 180,000-sq.-ft. building, scheduled for completion in April 2006, will provide 206 new jobs. It will be the most efficient cooked ham plant in the U.S., employing the newest technologies available and meeting the highest food standards in the industry, the company stresses.Wayne Farms LLC, an Oakwood, Ga., subsidiary of ContiGroup Cos., only has $55 million on the table this year, but that's just half the planned outlay for a three-phase poultry plant in Decatur, Ala. "The demand for product and the growth of our business partners has increased significantly durving our need for growth and expansion," says Elton Maddox, president and CEO. The phase one build-out will increase the company's annual production by more than 40 million lbs. The 100,000-sq.-ft. facility will have two fully cooked production lines and will be built to allow modifications and initiation of phases two and three. If all comes to pass, Wayne Farms will have spent $110 million on the facility.Northwest Cattlemen's Alliance, Sanderson Farms, OK Foods and Ridgefield Farms also are constructing animal protein further-processing facilities this year.

How efficient is your capital?

"Capital efficiency analysis" is a key metric tracked by Christopher Growe, analyst with A.G. Edwards, St. Louis. "Companies consistently investing incremental capital drive superior growth and stock price appreciation," Growe writes in a recent report. "Companies investing in capital and displaying improving capital efficiency and margin expansion display the strongest earnings growth."

A.G. Edwards defines capital efficiency as "the ratio of fixed assets plus operating working capital to sales, indicating the productivity of the asset base in generating incremental sales. We add a second element in the operating margin to further indicate those companies that are effectively leveraging their asset base to produce higher levels of profitability."

Companies with the highest capital efficiency: Anheuser-Busch (61.2 percent in 2003), Hershey Foods (58.2 percent) and Kraft (47.9 percent). Those with the highest operating margins: Hershey Foods ConAgra and Anheuser-Busch (Kraft was fifth).